DON’T BE A B2L VICTIM
The Financial Times carried on its front page this weekend a thinly veiled warning for over exuberant landlords.
It focused on stories about the big lenders becoming more generous or lax in their lending policies, depending on how you look at it.
Traditionally lenders have required a 130% cover of the mortgage by rent. However, average minimum rental cover has fallen from 130 percent in 2004 to 125% percent today.
In recent months this in some cases has fallen even more to just 115 or 100 percent. The financial services group GMAC, for example dropped its minimum ratio from 125% and now offer products as low as 100 percent.
One lender no longer looks at rental income at all. Rooftop Mortgages, part of investment bank Bear Stearns, has a buy-to-let product with no minimum rental cover and no need for proof of rental or earned income.
Meanwhile borrowers need smaller deposits, as low as 10% in some cases.
In addition lenders are more and more prepared to lend larger and larger amounts with less and less security. Bank of Ireland, for example has upped its limit from £2.5m to £20m.
Others such as Mortgage Express part of Bradford & Bingley, has lifted its lending limit on property portfolios from £2m to £5m per customer. Whilst the Woolwich will allow borrowers to build a portfolio of £5m with loans on individual properties of up to £2.5m.
This is fine providing the 4 horsemen of the “buy-to-let apocalypse” do not arrive: rising interest rates, stagnant or falling house prices, falling tenant demand and rising unemployment. The last 3 seem far from imminent but we are in a period of rising interest rates and globalisation bringing both the benefits of a more dynamic economic performance but also potential greater economic instability meaning nothing can be ruled out.
Should even two of these horsemen arrive in town at the same time; then the whole investment miracle of leveraging your savings with a highly geared investment suddenly unwinds in spectacular cases of debt, negative equity and personal bankruptcy as happened in the early 1990’s.
Property Hawks advice:
Think very carefully before you take on additional debt.
Only borrow what you need or what will maximise your returns or achieve you financial goals; not just because you can and lenders will advance it.
Remember when it comes to investments it is always best to spread your risk.
Many people forget that they already have a considerable investment in the UK residential housing market if they own their own home. Make sure that you are not placing all your eggs in one basket by ensuring you have a diversity of investments e.g. shares, cash, pension, etc.
Make sure that you do your research.
Remember to use the Property Hawk investment calculator to see what your rates of return are and whether with the latest round of interest rate rise the figures for a potential investment still stack up.
Establish whether there is sufficient tenant demand and what the supply situation is. Whilst places like London are booming and other parts of the country are also seeing strong demand, there are places where an influx of new apartment developments has outpaced demand and landlords are facing falling rents and a shortage of tenant demand
Whilst the UK is producing approximately 40,000 too few houses each year; which has in part helped to fuel the rapid price inflation of the last few years. It should also be remembered that with approximately 25 million units of accommodation in the UK, if you do miss out on one purchase; there are plenty left.
Always remember that you should buy a property because it’s a good investment, not because you have the money and want to invest. This way you should end up with a good buy which will stand you in good stead as a long-term investment.
By following this advice you should avoid the pitfalls of becoming a buy-to-let victim and allow yourself to attain your long-term financial goals.